Today’s confirmation bias for our positions in Pepsi (PEP) and Microsoft (MSFT) comes via Barron’s and their interview with Eric Schoenstein, portfolio manager for the Jensen Quality Growth Fund (JENSX).
PepsiCo: The fund doesn’t pick sides when it comes to Pepsi versus Coca-Cola ( KO ) at least not when it comes to the companies’ stocks. “There’s room in the fund for both,” says Schoenstein, though PepsiCo, a top holding, offers more upside. While Coca-Cola dominates on the beverage front, PepsiCo has snacks, with a 40% global market share or 10 times bigger than its next largest competitor, he says. The company’s 22 iconic brands, including Quaker Oats, Gatorade and Doritos, generate more than $1 billion in sales per year. PepsiCo has also paid a dividend for 44 consecutive years and had an average ROE of 35% over the past five years. In fact, last year PepsiCo’s ROE reached a 15-year high of 49. Consensus estimates peg 2016 earnings per share at $4.76 or just 4% higher than last year, but is expected to rise 8% to $5.16 by 2017. At a recent $109.53, shares trade at 21.2 times 2017 earnings, not far below their decade high of 22 times. Shares yield 2.7%.
Microsoft: It has long been considered an out-of-touch consumer technology company, but Schoenstein sees a mature software business with promise. When Steve Ballmer stepped down as CEO early 2014 and Satya Nadella took the helm, Microsoft started to get more credit, he says. Its Windows 10 operating system holds promise and its cloud service Azure is growing faster than Amazon’s offering. Late Tuesday, Microsoft announced better-than-expected quarterly results, helped by Azure sales that soared 102%. In Microsoft’s most recent annual report, return on equity dipped below 15%. But based on Schoenstein’s calculations, using recurring operational ROE, which excludes one-time write-downs related to Nokia, Microsoft clears its hurdle. Analysts expect earnings per share to rise 6% by the end of its fiscal year ended June 2017. Like PepsiCo, Microsoft’s valuation may give pause. At about $54, shares trade at 19 times 2017 earnings estimates, a notch below its 10-year high of 20. Its dividend yield is 2.7%.
Follow the link below for Eric’s other top three picks.